Consistent diffuse initial conditions in the Kalman filter
Ivo J. Steyn · RePEc: Research Papers in Economics · 1989
For nonstationary State Space models, diffuse initial conditions are usually represented by choosing the initial variance matrix P 0 equal to k.I, with k some large constant.It is shown that this leads to inappropriate (unconditional) variance structures in some common models, and that it leads to inconsistenties under transformations.An alternative method of generating P Q is proposed which does not suffer from these defects, and in a small simulation study appears to have considerable advantages over the traditional choice of k.I.